Contests, Sweepstakes, And Giveaways – Is Yours Legally Compliant Or An Illegal Lottery?

In the book-marketing world, giveaways are popular among authors, especially when launching a new book. Giveaways are innovative tools for authors to promote awareness, engage readers, locate new readers, collect useful marketing data, and possibly increase earnings potential. Many authors, however, are unaware that giveaways are regulated by various federal and state laws that, if not followed properly, could subject the author to fines and possible criminal prosecution.

Sounds overwhelming, right?

Don’t worry. Designing a legally compliant promotional campaign is easy as long as you: 1) understand the state and federal laws that regulate these promotional campaigns, 2) distinguish your giveaway from a lottery, and 3) follow the rules of the online platform where you host your giveaway.

The difference between giveaways and lotteries

Lotteries and giveaways (i.e. sweepstakes and contests) give people chances to win a prize, but there are specific nuances that distinguish them.

Sweepstakes

Promotional campaigns with prize giveaways where winners are picked at random. Prizes vary and can be almost anything from money to houses and everything in-between like a free book signed by an author.

Contests

Promotional campaigns where winners are chosen based on merit or an element of skill (e.g. best essay, yummiest recipe, funniest photograph). Most authors use the term contest to define their giveaway. Unless skill is involved to help select the contest winner then the promotional campaign is technically a sweepstake.

Lottery

Lotteries are prize drawings designed to make money where people pay to play (like Powerball or Lotto) and winners are chosen by chance. Governments heavily regulate lotteries. Private lotteries are illegal.

Laws that regulate giveaways and lotteries

In the US, various federal and state laws regulate sweepstake and contest promotional campaigns.

Federal

Certain federal agencies have jurisdiction to oversee promotional activities (like the Federal Trade Commission, the Federal Communications Commission, the United States Postal Service, the Department of Justice). Running a promotion involving alcohol, tobacco, firearms, gasoline, insurance, and dairy products are strictly regulated. The good thing for authors, as long as your giveaway avoids being classified as a lottery (see below) or looking like a scam (payment for entry into a sweepstake), it is unlikely the FTC or FCC would get involved with your giveaway.

State

Giveaway laws vary from state to state which can make designing a giveaway difficult. It is not the state of the sponsor that matters but the state of where the participant lives. Since most giveaways are online, you need to consider the giveaway laws of every state when designing your promotional campaign. Fortunately for authors, most giveaways are probably legally compliant as long as the giveaway is not considered a lottery (see below). Most states heavily regulate any giveaway where alcohol, tobacco, or guns are involved. Here are few examples of state laws governing giveaways.

California

Any person who violates the provisions for the operation of contests and sweepstakes, or runs a private lottery in California is guilty of a misdemeanor.

The California Business and Professions Code Sections set forth a list of requirements that must be clearly and conspicuously disclosed when running a contest or sweepstake. There are also many other requirements to follow. For example, use of the word “lucky” is prohibited to describe a contest entry form. Sweepstakes must use the verbiage “no purchase or payment necessary” for entry. That statement must be in a separate paragraph in the rules and printed in capital letters in contrasting type. A contest can require payment to play as long as there is skill involved when picking the winner (without which, the contest is a lottery). A sweepstake cannot require payment. There is no skill involved when picking a sweepstakes winner, so requiring payment to play in a sweepstake is a lottery.

Contests are prohibited from requiring a purchase to play even if the contest winners are selected based on skill.

Florida and New York

Giveaways with prizes worth $5000 or more must be registered with the state and bonded before the commencement of the campaign. A list of winners must be provided to anyone who requests one.

Virginia

Giveaway sponsors cannot require participants to visit a location to enter the giveaway (time is consideration, and thus the giveaway would be a lottery).

How to make your giveaway legally compliant

Private lotteries are strictly prohibited in the US, which means sponsors of giveaways must distinguish their promotional campaign from a lottery to be legal.

A lottery is defined by three requirements:

Promotional campaigns that offer a prize with value

Winners of the campaign are chosen by chance

Consideration is given for participating in the campaign

In order to distinguish your giveaway from a lottery, you need to eliminate one of these three requirements. Obviously, any useful contest, sweepstake, or giveaway has a prize. This means an author creating a campaign needs to either eliminate requirement two or three. If your giveaway requires skill to win, then you have eliminated requirement two, the element of chance. But the easiest way is to eliminate requirement three — consideration.

What is consideration?

In the legal world, consideration is defined as something of value. Many states have particular definitions of what constitutes consideration, so it can be difficult to determine if your giveaway requires consideration for participation. Consideration tends to be monetary. But it need not be. Consideration can also be related to the entrant’s time and effort.

For example, consideration could be the purchase of a contest sponsor’s product (like a book) or anything that might be beneficial to the contest sponsor (like a creating a new recipe using the sponsor’s product). Requiring someone to spend time (which is valuable) to write a book review (which benefits the contest sponsor) is consideration. Asking winners to pay shipping to receive the prize, send a text message to ten friends about your book, show a receipt to prove they purchased your book on Amazon can also be construed as consideration.

By eliminating the consideration element, a giveaway will also avoid many state laws that prohibit contests from requiring payment to play even though skill is required to win the contest.

Elements to consider when designing your giveaway

The prize

Have a prize (a given or why bother with a giveaway) and identify it clearly— the number of prizes given, an accurate description of the prize, and the retail value of each prize. Certain states have strict rules on how the prize is defined.

The sponsor

Provide the complete name and address of the sponsor and promoter of the contest.

Requirements for entering and how the giveaway will be operated

Provide details as to who can enter, all methods to do so, and who is excluded, like people under 18 years of age, children under 13, spouses/relatives/family members of the sponsor, employees, or anyone living with the sponsor, only US citizens or US residents.

Note the geographical location of the giveaway.

Avoid a lottery classification by underscoring there is no consideration needed for participation. You can use phrases like no purchase necessary or no fee required.

Explain any operational issues like how duplicate entries are handled, how the winner will be notified and on what date.

Are there any restrictions? If so, explain clearly.

Are there any releases to be signed so the sponsor can use the winner’s photo? If so, give full disclosure.

Duration

It is very important to set the start and end times for the giveaway, then stick to it. Why? Because running a giveaway campaign creates a contract with the participants. If you stop the campaign midway because of lack of participation, you will breach that contract with those who have entered the giveaway.

Selection of the winners

Explain if some element of skill is required to win, or if the winner is chosen from a random drawing. Provide where and when a list of winners can be obtained.

Official Rules

Post your rules online, and make sure they are easy to find and in a conspicuous place. Once you have the giveaway rules posted or published, make sure you follow the “official rules” as written. Otherwise, any variation will be a breach of contract with your participants.

Misleading

Avoid anything in your contest that might be misleading or ambiguous. For example, Cole Haan ran a social media contest for a chance to win a $1,000 shopping spree. To enter, people were required to create a “Wandering Sole” Pinterest board with five photos and the hashtag #wanderingsoles. The FTC sent a warning letter (but no fine) to Cole Haan because the company did not require people to disclose on Pinterest that the Wandering Sole boards were part of a contest, which made the boards undisclosed endorsements.

Avoid anything that might run afoul of consumer protection laws, like a giveaway promotion that is a ruse for obtaining email information when the sponsor has no intention of actually offering a prize.

Avoid violating intellectual property laws by using a company’s trademark for a product giveaway in a way that makes it seem the company is sponsoring, promoting, or affiliated with the giveaway. You can use the company trademark to describe the product under the fair use laws.

Social media platforms and giveaways

Wherever you decide to host your giveaway, make sure you follow the promotion rules for the social media platform.

On Facebook, the promotion sponsor is required to include among other things: 1) a release of Facebook by each entrant or participant, and 2) an acknowledgment that the promotion is not sponsored, endorsed or administered by Facebook.

Tax liability

Prize winnings in the US are subject to US taxes and should be reported to the IRS as “other income” regardless of the value.

Giveaway sponsors are obligated to file a 1099 form to report prizes valued at $600 or more to the IRS, but sponsors can report prizes of any amount to the IRS. Prizewinners who fail to report their winnings could find themselves investigated by the IRS should a discrepancy arise between what the sponsor and winner reported separately.

Sponsors of giveaways should make sure participants are aware of the tax implications.

Hosting a legally compliant giveaway involves many legal issues which must be considered and will take more time than merely posting a quick promotional campaign online. Authors need to familiarize themselves with and adhere to the variety of federal and state laws that regulate giveaways. Avoiding a giveaway being classified as a lottery is a good starting point to making your giveaway legally compliant.

If you have questions about your specific giveaway, consult an expert in your state for guidance. Good luck and may the odds of designing a legally compliant giveaway be ever in your favor.

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